There is a saying that the only two sure things in life are deaths and taxes. Many people spend a significant amount of their time and energy trying to avoid both of those inevitabilities. Unfortunately, the tactics that people may employ to try to reduce their tax obligations from sometimes put them at risk.
Other times, people might sidestep what seems like a frustrating and unnecessary process, only to realize that they may have unintentionally broken the law. Employed individuals rely on their employers to withhold funds for income taxes. They may assume that the estimated payments made throughout the year fully covered their income taxes.
They might choose not to file a tax return because they think that they owe nothing and might have a minor refund due to them. The hassle of filing the return may not seem worth it. Those individuals may not realize that the failure to file a tax return could result in major consequences for them.
The impact of missed returns
The IRS requires that those earning income file an annual tax return to verify that they have paid what they should based on their assets and all of their sources of income. They help the IRS reconcile estimated payments with actual tax responsibilities.
Technically, there are no penalties for failing to file a tax return if the IRS actually owes the taxpayer a refund. The risk is the potential of underpaid income taxes. If a taxpayer didn’t pay the full amount they should have and they fail to file an income tax return, they are then subject to the failure to file penalty.
The IRS assesses a 5% penalty based on the amount of unpaid taxes. The penalty is per month that a tax return is late. There is a cap of 25% of the value of the unpaid taxes. That amount then accrues interest. Once the return is 60 days late, a minimum penalty amount of $485 is possible.
Many circumstances could lead to a taxpayer unintentionally underpaying their taxes. Perhaps one of their dependents aged out in the last year. Maybe they divorced, and their spouse is the one claiming the children for income tax purposes. Maybe they have secondary streams of income, such as investments or rental properties. Any of those scenarios might mean that an individual owes taxes when they file their annual return.
Learning more about income tax rules can help those facing controversies choose how to respond. People who need to communicate with the IRS and resolve issues related to unfiled returns often need help to avoid worsening their circumstances, and that’s okay.
